Davis Shifts on MTBE to Avert Crisis

Gov. Gray Davis’ announcement Thursday that he may delay banning the pollutant MTBE from gasoline reflects an election year gamble that it is better to risk the ire of environmentalists than a big run-up in gasoline prices.

More specifically, Davis is trying to avert a second energy crisis--one that could hit late this year, about the time voters decide whether to give the Democratic governor a second term.

And if a consultant’s report warning this week of prolonged gasoline shortages and price spikes proves true, most Californians would feel the impact directly, unlike last year’s electricity shortage that resulted in half a dozen blackouts and never hit Los Angeles.

In one of his most high-profile decisions, Davis in March 1999 said he was banning MTBE from gasoline as of this coming December. The additive is a health hazard that may cause cancer.

Davis ordered the ban after MTBE was shown to be seeping from under gas stations and other oil facilities across the state, tainting public drinking water supplies from Santa Monica to Lake Tahoe.

Added to gasoline to reduce air pollution, MTBE turned out to be an insidious water pollutant. Water officials continue to discover new contamination sites. Just last month, officials announced that a plume of tainted ground water has moved close to a well that produces drinking water for 17,000 homes in Rialto, Fontana, Colton and Bloomington.

A study commissioned by Santa Monica and several other cities estimated that it could cost at least $29 billion to remove MTBE from soil and water supplies nationwide.

The governor’s decision to ban MTBE was cheered widely by environmentalists, who represent an important part of his support base.

At the same time, Davis turned to the Bush administration seeking an exemption from a federal Clean Air Act requirement that states add so-called oxygenates--such as MTBE and ethanol--to gasoline.

The U.S. Environmental Protection Agency rejected the request last June. It did so even though Davis and oil company representatives contended that a new formulation of gasoline would soon allow California to meet clean air requirements without oxygenates.

Without an exemption from the EPA, the state’s oil refiners, facing a ban on MTBE, would be forced to use ethanol, the only other practical oxygenate.

“The governor based his decision to ban MTBE on science,” Davis campaign spokesman Roger Salazar said. “Now, we’re being forced to take into account the economic consequences of the Bush administration’s failure to grant us the waiver.”

Salazar added that he believes environmentalists will “understand the situation we find ourselves in.”

Indeed, some environmentalists did express some understanding for Davis’ predicament.

“I don’t think anybody has agreed to support [a delay in the ban],” said V. John White, a Sacramento lobbyist who works on environmentalist issues. “But there is a degree of sympathy for the circumstances he finds himself in. The governor is going to do what he does on the delay, and some people will criticize him.”

Others were less charitable, saying that by delaying the ban on a drinking water contaminant, Davis would be putting oil company interests ahead of public health.

“Drinking water is California’s most important resource. MTBE is very quickly destroying that resource,” said Richard Drury, legal director of Communities for a Better Environment, an environmental group that sued 14 oil companies to force them to clean up sites contaminated by MTBE.

Davis’ announcement that he might delay the ban came after a report issued Tuesday warned that the ban could cause fuel shortages and drive up prices at the pump to as high as $3 a gallon.

Ordered by the state Energy Commission, the report was prepared by Stillwater Associates, an Irvine-based firm that specializes in oil industry issues. The study recommends that the ban be delayed until the end of 2005, and says the phase-out of MTBE could cost California consumers $1 billion to $3 billion a year.

The specifications for California gasoline are so strict--especially for the kind needed to blend with ethanol--that refiners outside the state are hard pressed to produce it, said David Hackett, president of Stillwater. The firm also found that the state lacks capacity to store imported gasoline and ethanol.

Prices could be further forced up because the physical makeup of ethanol makes it impossible to ship through normal petroleum pipelines, Hackett said. Rather, it must be mixed in special tanks at distribution terminals, he said.

Some environmentalists question the report.

“I have never seen a government report come out that is so clearly biased in favor of the refinery industry,” Drury said. “It is basically a wholesale attack on environmental regulations.”

Others claim that Davis may be turning his back on ethanol, which they call a clean, renewable resource that can be produced in California. “What is surprising to me is how hard Gov. Davis is working to give multinational oil companies 100% market share while totally ignoring a $1-billion grass-roots agricultural industry here in California, ready to produce a clean, renewable fuel,” said Tom Koehler of Kinergy Resources, an ethanol development company, and a member of the California Renewable Fuels Partnership.

However, there has been little investment in ethanol production in California. The state’s conversion to ethanol was slowed by the Davis administration’s effort to get a waiver from federal officials that would have exempted the state from using such oxygenates.

Lately, to tamp down protests, the Davis administration has been meeting with selected environmentalists, including some of MTBE’s fiercest critics in the Legislature.

The governor knows he runs the risk of losing some support among environmentalists if he delays the ban. But the governor also is sending a message to Midwestern ethanol producers that so long as California continues using MTBE in its gasoline, they won’t win the lucrative California market.

“We’re not going to be held hostage to another energy cartel,” a top Davis administration official said, speaking on the condition of anonymity.

The official noted that only a handful of companies, led by Archer Daniels Midland, based in Decatur, Ill., control 80% of the nation’s ethanol production.

Presidential politics also play a part in what amounts to a trial balloon by Davis, the aide said.

In Washington, D.C., Senate Majority Leader Tom Daschle of South Dakota is carrying energy legislation that includes a requirement that states use ethanol. He is considered a potential presidential candidate.

The ethanol rule might cheer Iowa corn growers, but a doubling of gas prices would have the opposite effect in California with its 58 electoral votes, the aide said.

Sen. Dianne Feinstein (D-Calif.) is pushing Daschle to exempt her state from the ethanol requirement, something Davis dearly wants. But on Friday, Feinstein suggested she was having a hard time persuading Daschle.

“What I have been told is the proposal by Sen. Daschle could result in the doubling of the cost of gasoline,” Feinstein said in her statement. “Clearly, that is untenable for California and it leaves Gov. Davis little choice.”

Feinstein said she and Davis “are trying to do everything we can to avoid” a delay on the MTBE ban.